Fed Tension And Interest In Increasing Interest

For anyone who was told to hurry up and buy a home in 2010 because interest rates were going to be raised any day the ongoing debate among central bankers in the US seems like a joke. Depressed interest rates were not just a short-term concept to boost a quick rebound. It seems, however, to have become a mainstay in a gritty and arduous recovery.

Janet Yellen is the current head of the Board of Governors of the Federal Reserve System and she has been sweating it out under pressure from banks who think the economy has fully recovered. A full recovery would let the banks feel justified in increasing interest rates on loans and therefore generating the profits they previously enjoyed. Yellen has held onto her position to keep interest rates low since before she was appointed to be the Chair. She made headlines as a Fed board member and vice chair by outlining exactly how hard, drawn out, painful, and unlucky the US recovery has been since the 2008 subprime mortgage crisis. And Yellen is still fighting to prove her data-driven point that, while things may have improved, they are not peachy keen. It seems that her ideas are finally catching on.

Friends in Tough Times

Jeffrey Lacker, President of the Richmond Federal Reserve Bank, has officially stated that he hasn’t officially decided how he will vote during the Fed’s mid-June meeting on interest rates. Although his exact stance is officially unofficial, he did state that US inflation should gradually rise back to 2% now that the oil slump seems to be subsiding. And that’s where the demand to raise interest rates seems to have a back door. The debate is now shifting from interest rates to inflation rates, but it remains a debate.

For the drastic inflation rate club, the idea is that the Fed should set higher goals and show the public that it is motivated to see real economic growth, not just a limping recovery. This camp seems to be led by Chicago Federal Reserve President, Charles Evans. It’s a good theoretical push in a financial world where perception can push reality. By showing companies, investors, and consumers the Fed is sure that the economy will grow, they could all react in a way that makes growth predictions come true. But that is a big risk.

Others who argue that 2% inflation is unrealistic or even irresponsible have good reasons, as well. These include the fact that the Fed’s fiscal intervention has not been all that effective over the past 6 years. Other questions are being raised concerning the way the Fed measures inflation. Although consumer price inflation has remained well under control, asset prices have undergone serious inflation, as assets such as stocks and other equities have become one of the most profitable investments in a low interest environment. Advocates for keeping the target inflation rates low are doing so from a perspective of protectionism, however. Common trite phrases like “the rich get richer” with asset inflation are also likely to come from this group. My take is that any tactic the rich can successfully use is probably one the common man should research and employ.

So what’s going to happen?

Janet Yellen is not going to excite anyone in the near future. Rates may take a slight bump by the end of the year, but I would be careful to use the word “hike” to describe the types of moves the majority of the central bankers in the US are willing to make. Just to be safe, most of them are keeping their statements clear and empty that way they won’t set off any exciting bumps or dips in the economy. Just remember, no matter what the Fed does, the anti-inflation group is right when they say the assets being bought today will be worth far more at a faster rate than anything else right now. So instead of whining about how people acquiring assets are getting rich, just go out and acquire some of your own.